1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
--------------------
Commission file number 011230
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Regis Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0749934
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7201 Metro Boulevard, Edina, Minnesota 55439
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(952)947-7777
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 4, 2001:
Common Stock, $.05 par value 41,391,917
- ---------------------------- ---------------------------------
Class Number of Shares
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2
REGIS CORPORATION
INDEX
Part I. Financial Information Page Nos.
--------------------- ---------
Item 1. Consolidated Financial Statements:
Balance Sheet as of March 31, 2001
and June 30, 2000 3
Statement of Operations for the three
months ended March 31, 2001 and 2000 4
Statement of Operations for the nine
months ended March 31, 2001 and 2000 5
Statement of Cash Flows for the nine
months ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-12
Report of Independent Accountants 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2001 AND JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 2001 JUNE 30, 2000
-------------- --------------
ASSETS
Current assets:
Cash $ 24,598 $ 14,888
Receivables, net 17,594 16,220
Inventories 103,704 91,823
Deferred income taxes 9,169 10,160
Other current assets 7,829 10,713
--------- ---------
Total current assets 162,894 143,804
Property and equipment, net 293,708 260,532
Goodwill, net 246,468 208,724
Other assets 17,363 15,295
--------- ---------
Total assets $ 720,433 $ 628,355
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 5,701 $ 9,983
Accounts payable 32,447 34,216
Accrued expenses 70,229 58,845
--------- ---------
Total current liabilities 108,377 103,044
Long-term debt 263,756 224,618
Other noncurrent liabilities 27,409 21,552
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding 41,322,142 and 40,702,707
common shares at March 31, 2001 and
June 30, 2000, respectively 2,066 2,035
Additional paid-in capital 162,288 150,793
Accumulated other comprehensive loss (5,695) (2,274)
Retained earnings 162,232 128,587
--------- ---------
Total shareholders' equity 320,891 279,141
--------- ---------
Total liabilities and shareholders' equity $ 720,433 $ 628,355
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
3
4
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
---- ----
Revenues:
Company-owned salons:
Service $ 226,309 $ 196,156
Product 90,338 79,111
--------- ---------
316,647 275,267
Franchise revenues:
Royalties and fees 9,536 9,069
Product sales 4,727 3,726
--------- ---------
14,263 12,795
--------- ---------
Total revenues 330,910 288,062
Operating expenses:
Company-owned salons:
Cost of service 129,510 112,256
Cost of product 48,405 42,913
Direct salon 28,725 24,146
Rent 44,478 38,639
Depreciation 10,756 9,346
--------- ---------
261,874 227,300
Selling, general and administrative 33,400 30,843
Depreciation and amortization 5,788 4,310
Other 3,473 2,827
--------- ---------
Total operating expenses 304,535 265,280
--------- ---------
Operating income 26,375 22,782
Other income (expense):
Interest (5,492) (4,187)
Other, net 165 608
--------- ---------
Income before income taxes 21,048 19,203
Income taxes (8,515) (7,586)
--------- ---------
Net income $ 12,533 $ 11,617
========= =========
Net income per share:
Basic $ .30 $ .29
========= =========
Diluted $ .30 $ .28
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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5
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
---- ----
Revenues:
Company-owned salons:
Service $ 654,491 $ 570,468
Product 269,999 232,111
--------- ---------
924,490 802,579
Franchise revenues:
Royalties and fees 28,159 26,809
Product sales 13,064 10,637
--------- ---------
41,223 37,446
--------- ---------
Total revenues 965,713 840,025
Operating expenses:
Company-owned salons:
Cost of service 375,501 324,943
Cost of product 144,874 124,888
Direct salon 82,182 69,533
Rent 129,024 111,419
Depreciation 31,268 26,909
--------- ---------
762,849 657,692
Selling, general and administrative 99,678 89,491
Depreciation and amortization 16,022 12,184
Nonrecurring items 3,145
Other 9,593 8,113
--------- ---------
Total operating expenses 888,142 770,625
--------- ---------
Operating income 77,571 69,400
Other income (expense):
Interest (16,328) (11,542)
Other, net 1,026 1,454
--------- ---------
Income before income taxes 62,269 59,312
Income taxes (24,934) (24,250)
--------- ---------
Net income $ 37,335 $ 35,062
========= =========
Net income per share:
Basic $ .91 $ .86
========= =========
Diluted $ .89 $ .84
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 37,335 $ 35,062
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 36,754 31,140
Amortization 10,885 8,167
Deferred income taxes 1,881 374
Other 1,072 (641)
Changes in assets and liabilities:
Accounts receivable (3,577) 242
Inventories (10,510) (10,101)
Other current assets 2,938 (801)
Other assets (2,596) (2,742)
Accounts payable (5,322) (5,141)
Accrued expenses 8,863 3,764
Other noncurrent liabilities 1,480 4,078
--------- ---------
Net cash provided by operating activities 79,203 63,401
--------- ---------
Cash flows from investing activities:
Capital expenditures (59,865) (55,998)
Proceeds from sale of assets 544 147
Purchases of salon assets, net of cash acquired (43,843) (60,867)
---------- ---------
Net cash used in investing activities (103,164) (116,718)
---------- ----------
Cash flows from financing activities:
Borrowings on revolving credit facilities 238,400 277,585
Payments on revolving credit facilities (224,100) (191,485)
Proceeds from issuance of long-term debt 25,000
Repayment of long-term debt (4,809) (28,995)
Increase in negative book cash 1,347
Dividends paid (3,693) (3,968)
Proceeds from issuance of common stock 1,039 1,143
--------- ---------
Net cash provided by financing activities 33,184 54,280
--------- ---------
Effect of exchange rate changes on cash 487 20
--------- ---------
Increase in cash 9,710 983
Cash:
Beginning of period 14,888 10,353
--------- ---------
End of period $ 24,598 $ 11,336
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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7
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation of Unaudited Interim Consolidated Financial
Statements:
The unaudited interim consolidated financial statements of Regis
Corporation (the Company) as of March 31, 2001 and for the three and
nine months ended March 31, 2001 and 2000, reflect, in the opinion of
management, all adjustments necessary to fairly present the consolidated
financial position of the Company as of March 31, 2001 and its
consolidated results of operations and cash flows for the interim
periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results of operations and cash flows
for the full year.
The year-end consolidated balance sheet data was derived from audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United
States of America. The unaudited interim consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements for the year ended June 30, 2000.
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed limited reviews of the interim consolidated financial data
included herein. Their report on such reviews accompanies this filing.
COST OF PRODUCT SALES. On an interim basis, product costs are determined
by applying an estimated gross profit margin to product revenues.
2. New Accounting Pronouncement:
Effective July 1, 2000, Regis adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended and interpreted (FAS 133). FAS 133 requires that
all derivative instruments, such as interest rate swap contracts, be
recognized in the financial statements and measured at their fair market
value. Changes in the fair market value of derivative instruments are
recognized each period in current earnings or shareholders' equity (as a
component of other comprehensive income), depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of FAS 133 did not have a
material impact on the Company's primary financial statements, but did
result in the recording of an unrealized loss of approximately $160,000,
net of tax, in other comprehensive income.
In the normal course of business, the Company is exposed to changes in
interest rates. The Company has established policies and procedures that
govern the management of these exposures through the use of financial
instruments. By policy, the Company does not enter into such contracts
for the purpose of speculation.
The Company's objective in managing its exposure to interest rates is to
decrease the volatility that changes in interest rates might have on
earnings and cash flows. To achieve this objective, the Company uses
interest rate swaps, as determined by management, to adjust a portion of
total debt that is subject to variable interest rates. The Company
designates these instruments as cash flow hedges. Under an interest rate
swap contract, the Company agrees to pay fixed rates of interest and
receive variable rates of interest based upon a notional amount of
indebtedness. These contracts are considered to be a hedge against
changes in the amount of future cash flows associated with the Company's
interest payments related to its variable-rate debt obligations.
Accordingly, the interest rate swap contracts are reflected at fair
value in the Company's consolidated balance sheet and the related gains
or losses on these contracts are deferred in
7
8
shareholders' equity as a component of comprehensive income. However, to
the extent that any of these contracts are not effective in offsetting
the change in interest cash flows being hedged, their ineffective
portion is immediately recognized in earnings. The net effect of this
accounting on the Company's operating results is that interest expense
on the portion of variable-rate debt being hedged is recorded based on
the fixed interest rate stated within the swap agreement. No other cash
payments are made unless the contract is terminated prior to maturity,
in which case the amount paid or received in settlement is established
by agreement at the time of termination, and usually represents the net
present value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the contract. Any
gains or losses upon the early termination of the interest rate swap
contracts are deferred in other comprehensive income and recognized in
income over the remaining life of the contract.
At March 31, 2001, Regis had interest rate swap contracts to pay fixed
rates of interest (ranging from 7.07 to 7.20 percent) and receive
variable rates of interest based on the three-month LIBOR rate (ranging
from 4.86 to 6.81 percent during the first nine months of fiscal 2001)
on $30 and $25 million notional amounts of indebtedness through June
2003 and April 2003, respectively.
3. Comprehensive Income:
Comprehensive income for the Company includes net income, transition
adjustment for the adoption of FAS 133, changes in fair market value of
financial instruments designated as hedges of interest rate exposure
and foreign currency translation charged or credited to the cumulative
translation account within shareholders' equity. Comprehensive income
for the three and nine months ended March 31, 2001 and 2000 were as
follows:
FOR THE PERIODS ENDED MARCH 31,
----------------------------------------
THREE MONTHS NINE MONTHS
--------------- ----------------
(Dollars in thousands)
2001 2000 2001 2000
---- ---- ---- ----
Net income $12,533 $ 11,617 $ 37,335 $ 35,062
Other comprehensive income:
Transition adjustment relating to the
adoption of FAS 133, net of taxes (160)
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes (653) (1,525)
Change in cumulative foreign currency translation (1,888) (441) (1,736) (419)
------- -------- -------- --------
Total comprehensive income $ 9,992 $ 11,176 $ 33,914 $ 34,643
======= ======== ======== ========
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4. Net Income per Share:
Basic earnings per share (EPS) is calculated as net income divided by
weighted average common shares outstanding. The Company's primary
dilutive securities are issuable under the Company's Stock Option
Plans, as amended. Diluted EPS is calculated as net income divided by
weighted average common shares outstanding, increased to include
assumed conversion of dilutive securities. Stock options with exercise
prices greater than the average market value of the Company's common
stock were excluded from the computation of diluted earnings per share
for the third quarter and first nine months ended March 31, 2001 as
they are considered to be anti-dilutive. The number of excluded stock
options were approximately 5,449,000 and 4,428,000, respectively, in
the third quarter and first nine months of fiscal 2001, and 2,798,000
and 594,000, respectively, in the third quarter and first nine months
of fiscal 2000.
The following provides information related to the weighted average
common shares used in the calculation of the Company's basic and
diluted EPS:
FOR THE PERIODS ENDED MARCH 31,
-----------------------------------------------------
THREE MONTHS NINE MONTHS
------------------------ ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted average shares for basic earnings per share 41,124,611 40,717,771 40,879,686 40,563,429
Effect of dilutive securities 1,141,173 1,131,691 998,371 1,130,111
---------- ----------- ---------- ----------
Weighted average shares for diluted earnings per share 42,265,784 41,849,462 41,878,057 41,693,540
========== ========== ========== ==========
5. Financing:
In September 2000, the Company amended its senior revolving credit
agreement to increase the amount available from $180 million to $250
million, extending the expiration date to August 2003, and modifying
certain debt covenant restrictions. In October 2000, the Company
borrowed $25 million under an 8.39 percent senior term note due October
2010 to finance acquisitions by the Company. The note contains certain
debt covenant restrictions which are similar to the Company's existing
debt covenants.
9
10
6. Transaction and Restructuring Liabilities:
The following provides additional information concerning the Company's
transaction and restructuring liabilities (dollars in thousands):
Restructuring - International Restructuring-Mergers
------------------------------- -------------------------------------------
Salon Salon Transaction
Closures & Closures & Charges
Dispositions Other Subtotal Severance Dispositions Other Subtotal Mergers Total
------------ ----- -------- --------- ------------ ----- -------- ------------ ------
June 30, 2000 $ 583 $ 67 $ 650 $2,824 $ 23 $ 145 $2,992 $ 35 $3,677
Change in estimate (31) 31
Cash utilization 270 5 275 1,086 27 39 1,152 35 1,462
Non-cash utilization 64 64 35 2 37 101
----- ---- ----- ------ ---- ----- ------ ---- ------
March 31, 2001 $ 249 $ 62 $ 311 $1,703 $ 27 $ 73 $1,803 $ 0 $2,114
===== ==== ===== ====== ==== ===== ====== ==== ======
7. Segment Information:
Each of the Company's operating segments have generally similar
products and services. The Company is organized to manage its
operations based on geographical location. The Company's operating
segments have been aggregated into two reportable segments generally
based on the way that management has organized the segments within the
enterprise for making operating decisions and assessing performance:
domestic salons and international salons. The Company operates or
franchises 6,236 domestic salons located within high-profile regional
malls and strip shopping centers under several different concepts
including Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts
and Cost Cutters brand names. The Company's International segment
includes 368 salons operating in leading department stores, strip
shopping centers, mass merchants and high street locations.
10
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7. Segment Information, continued:
Summarized financial information of the Company's reportable segments
for the three and nine months ended March 31, 2001 and 2000,
respectively, is shown in the following table.
FOR THE PERIODS ENDED MARCH 31,
--------------------------------------------------
THREE MONTHS NINE MONTHS
---------------------- -----------------------
(Dollars in thousands)
2001 2000 2001 2000
---- ---- ---- ----
Company-owned revenues:
Domestic $ 293,413 $ 250,445 $ 854,391 $ 725,210
International 23,234 24,822 70,099 77,369
--------- --------- --------- ---------
Total $ 316,647 $ 275,267 $ 924,490 $ 802,579
========= ========= ========= =========
Salon contribution:
Domestic $ 52,050 $ 44,867 $ 153,107 $ 133,266
International 2,723 3,100 8,534 11,621
--------- --------- --------- ---------
Total $ 54,773 $ 47,967 $ 161,641 $ 144,887
========= ========= ========= =========
In addition to the company-owned revenues detailed in the table above,
the Company also recorded franchise revenue as part of consolidated
revenues for the third quarter and first nine months of fiscal 2001 of
$14.3 million and $41.2 million, respectively, as compared to $12.8
million and $37.4 million, respectively, for the third quarter and
first nine months of fiscal 2000. The expenses associated with the
Company's franchising activities are included in selling, general and
administrative and other operating expenses.
8. Acquisitions:
During the nine month period ended March 31, 2001 and 2000, the Company
made numerous acquisitions. These acquisitions have been recorded using
the purchase method of accounting. Accordingly, the purchase prices
have been allocated to assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The
acquisitions recorded using the purchase method of accounting,
individually and in the aggregate, are not material to the Company's
operations. Operations of the acquired companies have been included in
the operations of the Company since the date of the respective
acquisition.
11
12
8. Acquisitions, continued:
Costs in excess of net tangible and identifiable intangible assets
acquired and components of the aggregate purchase prices of the
acquisitions were as follows:
NINE MONTHS
ENDED MARCH 31,
----------------------------
(Dollars in thousands)
2001 2000
---- ----
Costs in excess of net tangible and
identifiable intangible assets acquired $ 49,572 $ 59,814
======== ========
Components of aggregate purchase price:
Cash $ 43,843 $ 60,867
Stock 11,247 1,588
Current and noncurrent payables assumed 7,272 3,969
-------- --------
$ 62,362 $ 66,424
======== ========
9. Benefit Plans:
On October 24, 2000, the shareholders of Regis Corporation adopted the
Regis Corporation 2000 Stock Option Plan ("2000 Plan"), which allows the
Company to grant both incentive and nonqualified stock options and
replaces the Company's 1991 Stock Option Plan.
A total of 3,500,000 shares of common stock may be granted under the
2000 Plan to employees of the Company for a term not to exceed ten years
from the date of grant. The term may not exceed five years for incentive
stock options granted to employees of the Company possessing more than
ten percent of the total combined voting power of all classes of stock
of the Company or any subsidiary of the Company. Options may also be
granted to the Company's outside directors for a term not to exceed ten
years from the grant date.
The 2000 Plan contains restrictions on transferability, time of
exercise, exercise price and on disposition of any shares acquired
through exercise of the options. Stock options are granted at not less
than fair market value on the date of grant. The Board of Directors
determines the 2000 Plan participants and establishes the terms and
conditions of each option.
In the second quarter of fiscal 2001, the Board of Directors approved a
special grant of 2,263,000 options for shares of common stock from the
2000 Plan. These options begin vesting in year three at a rate of
one-third per year for three years and expire ten years from the date of
grant.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheet of Regis
Corporation as of March 31, 2001, and the related consolidated statements of
operations for the three and nine month periods ended March 31, 2001 and 2000,
and of cash flows for each of the nine month periods ended March 31, 2001 and
2000. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of June 30,
2000, and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the year then ended (not presented
herein), and in our report dated August 22, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
accompanying consolidated balance sheet information as of June 30, 2000, is
fairly stated, in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
April 24, 2001
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation, based in Minneapolis, Minnesota, is the world's largest
owner, operator, franchisor and acquirer of hair and retail product salons in
all 50 states, Puerto Rico, Canada and the United Kingdom. The Regis worldwide
operations include 6,604 salons at March 31, 2001 operating in two segments:
domestic and international. The Company's domestic segment includes 6,236 salons
operating primarily under the brand names of Regis Salons, MasterCuts, Trade
Secret, SmartStyle, Supercuts and Cost Cutters. The Company's international
operations include 368 salons located in the United Kingdom. The Company has
40,000 employees worldwide.
Third quarter fiscal 2001 revenues grew to $330.9 million, including franchise
revenues of $14.3 million, a 14.9 percent increase over fiscal 2000 third
quarter total revenues of $288.1 million. Revenues for the nine months ended
March 31, 2001 grew to $965.7 million, including franchise revenues of $41.2
million, a 15.0 percent increase over total revenues of $840.0 million in the
comparable fiscal 2000 period.
Operating income in third quarter of fiscal 2001 increased to $26.4 million, a
15.8 percent increase over operating income of $22.8 million in the comparable
fiscal 2000 period. Operating income for the first nine months of fiscal 2001
grew to $77.6 million, an 11.8 percent increase over operating income of $69.4
million in the first nine months of fiscal 2000.
Net income in the third quarter of fiscal 2001 increased to $12.5 million, or
$.30 per diluted share, an earnings per share increase of 7.1 percent from third
quarter fiscal 2000 net income of $11.6 million, or $.28 per diluted share. For
the nine months ended March 31, 2001, net income grew to $37.3 million, or $.89
per diluted share. This represents an earnings per share increase of 6.0 percent
over net income of $35.1 million, or $.84 per diluted share, for the first nine
months of fiscal 2000.
Prior year fiscal 2000 results for the first nine months include merger and
transaction costs associated with the October 1999 merger with Supercuts
(Holdings) Limited (Supercuts UK) which were nonrecurring in nature. Exclusive
of this nonrecurring item, operating income for the first nine months of fiscal
2001 increased 6.9 percent to $77.6 million compared to $72.5 million in the
comparable fiscal 2000 period. Net income for the first nine months of fiscal
2001 decreased to $37.3 million, or $.89 per diluted share, an earnings per
share decrease of 2.2 percent from the prior year, exclusive of nonrecurring
items.
14
15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from the Company's Consolidated Statement of
Operations expressed as a percentage of total revenues, except as noted.
FOR THE PERIODS ENDED MARCH 31,
-------------------------------------------
THREE MONTHS NINE MONTHS
------------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
Company-owned service revenues (1) 71.5% 71.3% 70.8% 71.1%
Company-owned product revenues (1) 28.5 28.7 29.2 28.9
Franchise revenues:
Royalties and fees 2.9 3.1 2.9 3.2
Product sales 1.4 1.3 1.4 1.3
Company-owned operations:
Profit margins on service (2) 42.8 42.8 42.6 43.0
Profit margins on product (3) 46.4 45.8 46.3 46.2
Direct salon (1) 9.1 8.8 8.9 8.7
Rent (1) 14.0 14.0 14.0 13.9
Depreciation (1) 3.4 3.4 3.4 3.4
Direct salon contribution (1) 17.3 17.4 17.5 18.1
Selling, general and administrative 10.1 10.7 10.3 10.7
Depreciation and amortization 1.7 1.5 1.7 1.5
Nonrecurring items 0.4
Other 1.0 1.0 1.0 1.0
Operating income 8.0 7.9 8.0 8.3
Income before income taxes 6.4 6.7 6.4 7.1
Net income 3.8 4.0 3.9 4.2
Operating income, excluding
nonrecurring items 8.0 7.9 8.0 8.6
Net income, excluding nonrecurring items 3.8 4.0 3.9 4.5
- --------------
(1) Computed as a percent of company-owned revenues
(2) Computed as a percent of service revenues
(3) Computed as a percent of product revenues
15
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RESULTS OF OPERATIONS:
REVENUES
REVENUES for the third quarter of fiscal 2001 grew to $330.9 million, an
increase of $42.8 million or 14.9 percent, over the same period in fiscal 2000.
Revenues for the first nine months of fiscal 2001 were $965.7 million, an
increase of $125.7 million or 15.0 percent, over the same period in fiscal 2000.
System-wide sales, inclusive of non-consolidated sales generated from franchise
salons, increased to $480.4 million and $1.4 billion, respectively, for the
third quarter and first nine months of fiscal 2001, representing increases of
15.5 percent and 14.6 percent over the same periods last year. These increases
in company-owned and system-wide sales are primarily the result of the total
number of salons added to the system through acquisitions and net salon
openings.
For the third quarter and first nine months of fiscal 2001 and 2000,
respectively, revenues by division were as follows:
THREE MONTHS NINE MONTHS
--------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Regis Salons $ 102,333 $ 94,246 $ 299,379 $ 281,350
Strip Center Salons (primarily Supercuts
and Cost Cutters) 75,142 55,783 213,001 151,703
MasterCuts 39,640 36,084 116,874 106,419
Trade Secret 43,394 41,029 135,172 122,669
Wal-Mart/SmartStyle 32,904 23,303 89,965 63,069
International 23,234 24,822 70,099 77,369
Franchise revenue 14,263 12,795 41,223 37,446
--------- --------- --------- ---------
$ 330,910 $ 288,062 $ 965,713 $ 840,025
========= ========= ========= =========
Same-store sales for domestic company-owned salons increased 2.7 percent and 3.0
percent in the third quarter and first nine months of fiscal 2001, respectively,
compared to 3.2 percent and 4.0 percent in the same periods in fiscal 2000. The
increase in same-store sales was lower than in the prior year due to inclement
weather and a slow down in the retail environment in November 2000 through March
of 2001 compared to the prior year. System-wide same-store sales for the third
quarter and first nine months of fiscal 2001 increased 3.2 percent and 3.4
percent, respectively, compared to 2.6 percent and 3.5 percent, respectively, in
the same periods a year ago. Same-store sales increases achieved are due to an
increase in the number of customers served and market-based price increases in
certain salon divisions. A total of 29 million and 85 million customers were
served system-wide during the third quarter and first nine months of fiscal
2001, respectively. The Company utilizes an audiovisual-based training system in
its company-owned salons. Management believes this training system provides its
employees with improved customer service and technical skills, and positively
contributes to the increase in customers served.
SERVICE REVENUES in the third quarter of fiscal 2001 grew to $226.3 million, an
increase of $30.2 million or 15.4 percent, over the same period in fiscal 2000.
In the first nine months of fiscal 2001, service revenues were $654.5 million,
an increase of $84.0 million or 14.7 percent, over the same period a year ago.
The increase in service revenues is primarily a result of salon acquisitions the
Company has made during the past twelve months and new salon openings in the
third quarter and first nine months of fiscal 2001.
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PRODUCT REVENUES in the third quarter of fiscal 2001 grew to $90.3 million, an
increase of $11.2 million, or 14.2 percent, over the same period in fiscal 2000.
In the first nine months of fiscal 2001, product revenues were $270.0 million,
an increase of $37.9 million, or 16.3 percent, over the same period of fiscal
2000. These increases continue a trend of escalating product revenues due to
product same-store sales growth of 4.4 percent and 5.6 percent in the third
quarter and first nine months of fiscal 2001, respectively, a reflection of the
continuous focus on product awareness and promotions, training and acceptance of
national label merchandise. Product revenues as a percent of total company-owned
revenues remained fairly consistent at 28.5 percent for the third quarter of
fiscal 2001 compared to 28.7 percent for the same period a year ago, while
product revenues as a percent of company-owned revenues increased to 29.2
percent for the first nine months of fiscal 2001 compared to 28.9 percent in the
comparable period of fiscal 2000.
FRANCHISE REVENUES, including royalties, initial franchise fees and product and
equipment sales made by the Company to franchisees, increased slightly to $14.3
million and $41.2 million in the third quarter and first nine months of fiscal
2001, respectively. The increase in franchise revenues is a result of an
increase in royalties derived from same-store sales growth and new store
openings of the Company's franchisees, which are not included in the Company's
consolidated revenues, and additional franchise units added through acquisition,
as well as an increase in product purchases by franchisees from the Company.
These increases were offset to a lesser extent by a reduction in franchisee
royalties and product sales due to acquisitions of franchise salons as
company-owned units.
COST OF REVENUES
The aggregate cost of service and product revenues in the third quarter of
fiscal 2001 were $177.9 million compared to $155.2 million in the same period in
fiscal 2000. For the first nine months of fiscal 2001, the aggregate cost of
service and product revenues were $520.4 million compared to $449.8 million in
the same period a year ago. The resulting combined gross margin percentages for
the third quarter and first nine months of fiscal 2001 improved 20 basis points
to 43.8 percent of company-owned revenues in the third quarter of fiscal 2001
compared to 43.6 percent of company-owned revenues in the same periods in fiscal
2000 while declining 30 basis points to 43.7 percent in the first nine months of
fiscal 2001 compared to the same period a year ago.
SERVICE MARGINS remained consistent at 42.8 percent in the third quarter of
fiscal 2001 while declining 40 basis points to 42.6 percent in the first nine
months of fiscal 2001, compared to 43.0 percent in the same period in fiscal
2000. The 40 basis point decrease is primarily a result of higher payroll and
related costs as a percent of service revenues in the Company's fixed cost
payroll divisions (MasterCuts and Strip Center Salons, including Supercuts) in
the first half of fiscal 2001. Inclement weather and a slow down in the retail
environment which resulted in de-leveraging of fixed cost payrolls against lower
same-store sales volumes adversely impacted these divisions during the first
half of fiscal 2001. In addition, these divisions have been experiencing some
wage pressure causing an increase in payroll costs.
PRODUCT MARGINS improved 60 basis points to 46.4 percent in the third quarter of
fiscal 2001 while improving 10 basis points to 46.3 percent in the first nine
months of fiscal 2001 from 46.2 percent in the same period of fiscal 2000. These
60 basis point and 10 basis point improvements in product margins in the third
quarter and first nine months of fiscal 2001 are a result of leveraging fixed
cost payrolls in the Trade Secret and MasterCuts divisions against retail
same-store sales growth.
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DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. For the
third quarter of fiscal 2001, direct salon expense of $28.7 million increased to
9.1 percent from 8.8 of company-owned revenues when compared to the prior
period. For the first nine months of fiscal 2001, direct salon expense of $82.2
million increased as a percent of company-owned revenues to 8.9 percent from 8.7
percent in the same period in fiscal 2000. The deterioration of 30 basis points
and 20 basis points in direct salon expense as a percentage of company-owned
sales in the third quarter and first nine months of fiscal 2001, respectively,
are a result of higher utility costs as well as higher freight costs due to
increased diesel fuel prices compared to the same periods a year ago.
RENT
Rent expense for the third quarter of fiscal 2001 was $44.5 million or 14.0
percent of company-owned revenues, compared to $38.6 million or 14.0 percent of
company-owned revenues in the same period in fiscal 2000. Rent expense in the
first nine months of fiscal 2001 was $129.0 million or 14.0 percent of
company-owned revenues, compared to $111.4 million or 13.9 percent of
company-owned revenues in the same period in fiscal 2000. The slight increase in
rent expense as a percentage of company-owned sales in the first nine months of
fiscal 2001 is a result of lower same-store sales volumes during the second
quarter of fiscal 2001 over which to spread this relatively fixed cost.
DEPRECIATION -- SALON LEVEL
For the third quarter and first nine months fiscal 2001, salon depreciation
expense was 3.4 percent of company-owned revenues compared to 3.4 percent in the
same periods a year ago.
DIRECT SALON CONTRIBUTION
For the reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, increased in
the third quarter of fiscal 2001 to $54.8 million, or 17.3 percent of
company-owned revenues, compared to $48.0 million or 17.4 percent of
company-owned revenues in the same period of fiscal 2000. For the first nine
months of fiscal 2001, direct salon contribution was $161.6 million, or 17.5
percent of company-owned revenues, compared to $144.9 million or 18.1 percent of
company-owned revenues in the same period a year ago.
SELLING, GENERAL AND ADMINISTRATIVE
Expenses in this category include field supervision (payroll, related taxes and
travel) and home office administration costs (such as warehousing, salaries,
occupancy costs and professional fees). Selling, general and administrative
(SG&A) expenses were $33.4 million, or 10.1 percent of total revenues in the
third quarter of fiscal 2001, compared to $30.8 million, or 10.7 percent of
total revenues in the same period in fiscal 2000. For the first nine months of
fiscal 2001, SG&A expenses were $99.7 million, or 10.3 percent of total
revenues, compared to $89.5 million, or 10.7 percent of total revenues in the
same period in fiscal 2000. These 60 basis point and 40 basis point
improvements, respectively, are primarily related to cost synergies created by
the Supercuts UK pooling
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consummated in the second quarter of fiscal 2000. Further, the timing of certain
marketing expenditures during the third quarter of fiscal 2001 as compared to
the corresponding period of fiscal 2000 contributed to the improvement.
DEPRECIATION AND AMORTIZATION -- CORPORATE
Corporate depreciation and amortization increased to 1.7 percent of total
revenues in both the third quarter and first nine months of fiscal 2001,
compared to 1.5 percent in the same periods in fiscal 2000. This increase is
primarily related to an increase in the level of intangible assets, primarily
goodwill, associated with the Company's acquisition activity during the past
twelve months and an increase in depreciation related to enhancements to the
corporate infrastructure.
OPERATING INCOME
Operating income in the third quarter of fiscal 2001, excluding nonrecurring
items, improved to $26.4 million, or 8.0 percent of total revenue, an increase
of $3.6 million or 15.8 percent over the same period in fiscal 2000. Operating
income in the first nine months of fiscal 2001 improved to $77.6 million, or 8.0
percent of total revenues, an increase of $5.0 million, or 6.9 percent over the
prior year period operating income of $72.5 million, or 8.6 percent of total
revenues, exclusive of nonrecurring items.
INTEREST
Interest expense in the third quarter and first nine months of fiscal 2001 was
$5.5 million and $16.3 million, respectively, representing 1.7 percent of total
revenues in the third quarter and first nine months of fiscal 2001, compared to
$4.2 million and $11.5 million, or 1.5 percent and 1.4 percent of total revenues
in the same periods in fiscal 2000. Interest expense as a percent of total
revenues has increased slightly because of higher debt levels primarily
resulting from the Company's acquisition program. In addition, the interest
expense for the first nine months of fiscal 2001 was impacted by higher interest
rates in the first and second quarters of fiscal 2001 when compared to the same
periods a year ago.
INCOME TAXES
The Company's effective income tax rate for the first nine months of fiscal 2001
is 40.0 percent compared to 40.9 percent in the same period a year ago.
Management expects the underlying effective tax rate for all of fiscal 2001 to
be between 40 and 41 percent, influenced by discrete Canadian acquisitions
occurring during the second and third quarters of fiscal 2001.
NET INCOME
Net income in the third quarter of fiscal 2001 grew to $12.5 million, or $.30
per diluted share, compared to $11.6 million, or $.28 per diluted share in the
same period in fiscal 2000. For the first nine months of fiscal 2001, net income
grew to $37.3 million, or $.89 per diluted share, compared to net income of
$35.1 million, or $.84 per diluted share in the same period in fiscal 2000.
Exclusive of nonrecurring items, a portion of which were not deductible for tax
reporting purposes, net income in the first nine months of fiscal 2000 was $37.9
million, or $.91 per diluted share.
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LIQUIDITY AND CAPITAL RESOURCES
Customers generally pay for salon services and merchandise in cash at the time
of sale, which reduces the Company's working capital requirements. Net cash
provided by operating activities for the first nine months of fiscal 2001 was
$79.2 million compared to $63.4 million during the same period in fiscal 2000.
The increase between the two periods is primarily due to improved operating
performance.
During the first nine months of fiscal 2001, the Company had worldwide capital
expenditures of $71.7 million, of which $11.8 million related to acquisitions of
744 salons. The Company constructed 31 new Regis Salons, 25 new MasterCuts
salons, 29 new Trade Secret salons, 150 new Wal-Mart/SmartStyle salons, 189 new
Strip Center salons and 33 new International salons, and completed 91 major
remodeling projects. All capital expenditures during the first nine months of
fiscal 2001 were funded by cash flows from the Company's operations and
borrowings under its revolving credit facility.
The Company anticipates its worldwide salon development program for fiscal 2001
will include the construction of approximately 430 to 450 new company-owned
salons, and 150 major remodeling and conversion projects. It is expected that
expenditures for these new salons and other projects will be approximately $85
to $90 million in fiscal 2001, excluding capital expenditures related to
acquisitions.
In light of the current economic environment, the Company plans to temporarily
reduce its salon growth beginning in fiscal year 2002 with the objective of
strengthening its balance sheet. Capital expenditures for fiscal 2002 are
expected to be approximately $65 to $70 million, or 15 to 20 percent below the
levels for this year's budget. Plans also call for the construction of 375 to
400 new salons and an acquisition budget of $25 to $30 million. This compares
with approximately 450 constructed salons and an $80 million acquisition budget
in fiscal 2001. By moderating its real estate strategy, the Company plans to
reduce leverage and thereby increase its flexibility to maximize future growth
opportunities.
Financing
Management believes that cash generated from operations and amounts available
under its revolving credit facilities will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
See discussion in footnote 5 to the Consolidated Financial Statements.
Dividends
During the first nine months of fiscal 2001, the Company paid regular quarterly
dividends totaling $3.7 million, or $.09 per share. On May 9, 2001, the Board of
Directors of the Company declared a $.03 per share quarterly dividend payable on
June 7, 2001 to shareholders of record on May 23, 2001.
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SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the federal securities laws, including statements concerning
anticipated future events and expectations that are not historical facts. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The forward looking
statements in this document reflect management's best judgement at the time they
are made, but all such statements are subject to numerous risks and
uncertainties, which could cause actual results to differ materially from those
expressed in or implied by the statements herein. Additional information
concerning potential factors that could affect future financial results is
included in the Company's Form S-3 Registration Statement filed with the
Securities and Exchange Commission on March 15, 2001.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk exposure of the Company relates to changes in interest
rates in connection with its debt, some of which bears interest at floating
rates based on LIBOR plus an applicable borrowing margin.
As of March 31, 2001, the Company had $147.5 million of total floating rate debt
outstanding. The Company manages its interest rate risk by balancing the amount
of fixed and variable debt. In addition, on occasion the Company uses interest
rate swaps to further mitigate the risk associated with changing interest rates.
Generally, the terms of the interest rate swap agreements range from two to
three years with settlement on a quarterly basis. As of March 31, 2001, the
Company has entered into interest rate swap agreements covering $55 million of
the floating rate debt, as discussed in Note 2 to the Consolidated Financial
Statements.
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the three months ended
March 31, 2001:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGIS CORPORATION
Date: May 11, 2001 By: /s/ Randy L. Pearce
-----------------------------------------
Randy L. Pearce
Executive Vice President
Chief Administrative and Financial Officer
Signing on behalf of the
registrant and as principal
accounting officer
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